Oil - it’s time for caution

There has been no ending sight to the crude oil advance. From $70 per barrel in September 2007 to $142 today July 1, 2008 oil has been on the steady rise along with extremes that we saw in the past few months. It has gone through all technical targets on the upside, and we are nearing a major psychological target of $150. In times like these nobody knows what will happen next, and whoever claims to know is full of crap (excuse me for the technical term). Thus I would not be gambling with crude and would stay on the cautious side rather than being aggressive.

Based on the chart (see below) there are no signals of crude easing off; in fact it is consolidating at the highs, which is usually pretty bullish. I think we will definitely test the $150 level before we can see any major move to the downside. As you can see from the chart we are in the up trending channel and the top of the channel is $150. On the other hand, we do see some divergences in the MACD and overbought RSI on the weekly charts. Also we are coming into a “squeeze”, meaning volatility is decreasing and momentum is decreasing on the upside, so any move outside of the squeeze should be significant. I personally would not initiate any shorts because of divergences or overbought indicators, but I would advise to be cautious.



On the fundamental side, as T. Boone Pickens have said we have demand that exceeds supply by 2 million barrels a day. However, at this level of gas prices we do see some of the demand easing off due to Americans driving less and the slowdown in the global economy. We also have the FED that is finally noticing the out of control inflation, and most likely will start doing something about it by raising interest rates, which should ease off oil prices a little. On the fundamental side we should see some relief in the near future. In the long run, I do think that these prices are not sustainable and we will see a final blow off before we come down to about $100 and stabilize.

Finally, cycles are pointing to the peak in oil around 2009-2010.

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